By Tiernan Ray

Eric’s been up in Seattle the last 24hours blogging away with great fury Microsoft’s (MSFT) financial analyst meeting. I thought I’d share what some folks on the Street had to say about their day in Redmond.

Thomas Weisel analyst Tim Klasell says the highlights for him were Microsoft’s continued success with corporate server applications, including Exchange Server for e-mail and Sharepoint and Dynamics CRN. Those three applications are expected to continue double-digit sales growth, he opines. He notes Microsoft’s expected release of the company’s Communications Server, which Eric talked about yesterday, and another corporate program called “PerformancePoint.” Klasell also says new versions of Windows Server and the company’s database program, SQL Server, will be out later this year and should both grow in double-digits, which is important because together they represent 64% of the Server & Tools part of Microsoft’s P&L, which has a very rich 35% operating margin, writes Klasell. Regarding Xbox, Klasell says Microsoft may have to cut prices agressively on the console to stimulate growth of ancilliary revenue, such as online downloads and other services. Klasell says Microsoft will have to invest capital in its online services to turn it into a “platform” for online applications, as Chief Software Architect Ray Ozzie outlined yesterday. Klasell compares this to Amazon.com’s (AMZN) development of online storage and other services. Microsoft, which Klasell rates Overweight, probably has 18% upside from the current price, to $35, he writes, using a combined valuation of 20x forward P/E, 18x free cash flow, and 5x sales.

Goldman Sachs analyst Sarah Friar says the three themes from yesterday were the strong product cycle at Microsoft, the focus on delivering programs over the Internet as a “service,” as opposed to shipping them on a compact disc, and “the ongoing emphasis to return cash to shareholders.” There was “little product moving news” at the meeting, says Friar, but in general, the day confirmed her thesis that product cycles “should kick in in the latter part of 2007.” Microsoft is “aggresively” going after business intelligence, security and “on-demand” parts of the software market, and will therefore remain “an overhang” to the stocks of companies in those markets, which I suppose would include Informatica (INFA), Symantec (SYMC) and Salesforce.com (CRM), respectively. Perhaps the most important product release in business applications this year, she writes, will be the forthcoming version of “Dynamic CRM,” Microsoft’s sales force-automation software. That program will be its counter to companies like Salesforce.com that dominate the selling of software as an online service. Friar thinks Microsoft is gaining steam in business applications as it moves from being just a desktop software vendor to a provider of corporate computing “infrastructure.” Friar thinks the coming of “Halo 3,” Microsoft’s own game for the Xbox, this fall is important, given that the last version, in $2004, generated $300 million in revenue of a high-margin nature. Friar is also interested in “Silverlight,” which is Microsoft’s answer to Adobe’s (ADBE) “Flash” software, which runs animations on Web sites. While Flash currently dominates, Microsoft can promote Silverlight through its vast developer network, and the software is “quite competitive from a technical perspective” in her opinion. She thinks the stock’s worth $37 based on a forward P/E of 17x her 2008 estimate.

Canaccord Adams analyst Peter Misek says Microsoft’s set to spend more, including on M&A, as it hopes to tap “innovation” to become a “Software + Services” company, and he says The company maintains the financial capability to pursue aggressive acquisition and R&D strategies.” Like Klasell, he’s got a $35 price target on the stock and thinks there’s downside protection to the stock with Microsoft currently trading at a forward P/E of 17x. “We concur with management that an integrated model is what Microsoft needs to attack the consumer and online markets and beat Apple and Google at their own game,” says Misek. In particular, he thinks Microsoft will increase the appeal of the operating system by increasing the number of software trials and digital downloads and expanding its retail and PC manufacturer partnerships. In its online services, the company can leverage its 380 million users of so-called Live! user identification accounts. The company can increase minutes of online use by things like improving its Web search tools and bringing them to mobile devices, he writes. Microsoft’s main approach to garnering more online ad revenue will be through the integration of its two recent acquisitions, Aquantive and AdECN, he writes. Regarding Xbox, the company wants to step-up its use as a delivery platform for content downloads, with a business model that’s somewhere between Apple’s “walled garden” approach with iTunes and the wide-open approach of Linux software. Misek says Netflix (NFLX) could be a “natural partner” to help Microsoft develop “download to DVD” on-demand movie offerings.

William Blair & Co. analyst Laura Lederman says that with more investment ahead for Microsoft, she thinks it’s important to note that, “While the stock has not performed well over the last five years, the company’s investments have paid off financially,” with operating income doubling to $19.7 billion in 2007 from 2002 levels and revenue rising 82% to $51.1 billion. Saying Microsoft has “one of the strongest flows of new products in recent years,” she thinks the stock is inexpensive and has little downside risk at an enterprise value-to-free cash flow multiple of 16.7x. While noting that Microsoft Chief Executive Steve Ballmer said the company may do “mergers of size,” Lederman notes that Microsoft commented that Yahoo! (YHOO) stock is expensive and seems to have a takeover premium baked into its current price. “We wonder if Microsoft may revisit acquiring Yahoo over time if its current online ad strategy does not bear fruit (and if Yahoo’s valuation declines),” writes Lederman. She’s most focused, however, on Microsoft’s gains in corporate applications, as Klasell noted, and she thinks the shipping of Performance Point Server could “foster gains” in corporate apps by adding the ability for “ad-hoc queries” of databases and something called “relational online analytical processing” (OLAP), which is a means to sort databases to analyze trends. Lederman thinks Microsoft is going after the low-end/high-volume parts of several markets, along the lines of the way it has pursued databases with SQL Server.

There’s more out there, I’m sure, but I think you get the idea. I’ll look forward to hearing more from Eric upon his return to give a more concise picture of what this all means for Mr. Softie.

Today, Microsoft shares are slouching toward the weekend, off 1% at $29.64.

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.